What Are the Risks of a Seller Carrying a Home Loan?

Seller-carried home loan risks include a buyer making unauthorized alterations.

The lack of qualified homebuyers in the housing market is causing homeowners to look at creative selling solutions, including seller-financed home loans. Known as contracts for deed or land contracts, these seller-carried mortgages offer sellers a solution to the lack of credit-qualified homebuyers. The arrangement carries risks, though. For example, home sellers carrying their buyers' mortgages risk buyer defaults along with foreclosure difficulties afterwards.

Buyer Default Risks

Home sellers using seller-financed home loans retain legal ownership of their properties while buyers gain equitable ownership or title. A risk for home sellers carrying their buyers' mortgages arises when those buyers default on their mortgages. Getting a defaulting buyer with a seller-financed home loan out of a property in which the buyer claims equitable title can sometimes be very difficult. In some cases, foreclosure of defaulting buyers with seller-financed home loans may take one to two years.

Due-on-Sale Clause Risks

Home sellers with mortgaged homes that sell those homes through land contracts risk inadvertently setting off their own loans' due-on-sale clauses. Mortgage loan due-on-sale clauses allow mortgage lenders to call in their loans when they're sold or transferred. A seller-financed home loan is both a sale and a transfer of property. Mortgage lenders learning of them may call in their own loans as a result. Due-on-sale clauses allow mortgage lenders to foreclose their loans.

Property Alteration Risks

Homebuyers using seller-financed loans might make alterations to their properties without seller knowledge or permission. If homebuyers are in the middle of property alterations when they default, their foreclosing home sellers could be stuck paying for or repairing those alterations. Foreclosed homes of any type, whether with lender-foreclosed mortgages or foreclosed seller-financed mortgages, generally need some work before they can be sold again. Foreclosed homes are also known as "distressed properties" and sometimes need costly repair work.

Preparing for Sales

Home sellers carrying their buyers' home loans must thoroughly prepare for their sales before signing any contracts. At minimum, home sellers offering to finance their buyers' home loans should run full credit checks on their buyers. Additionally, seller-financed home purchase contracts with buyers should completely spell out all contract terms and conditions in clear, concise language. Home sellers offering buyers seller financing must ensure buyers agree to all foreclosure, taxes, insurance and property alterations rules before contract signing occurs.

About the Author

Tony Guerra served more than 20 years in the U.S. Navy. He also spent seven years as an airline operations manager. Guerra is a former realtor, real-estate salesperson, associate broker and real-estate education instructor. He holds a master's degree in management and a bachelor's degree in interdisciplinary studies.